Comparative Advantage

In economy, the favors comparative is the principal concept of the traditional theory of the international business. It was approached by Robert Torrens in 1815, and was shown for the first time by the British economist David Ricardo in 1817 in its Principes of the political economy and the tax . The Théorie associated with the comparative advantage explains why, in a context of Libre-échange, each country, if it specializes in the production for which it lays out of the strongest Productivité ou less faible, compared to its partners, increases his national wealth. This production is that for which it holds a “comparative advantage”. According to the terms of Universalis , it is about one of the theorems more the “against-intuitive” relentless and more of the modern economy.

In other words, the principal conclusion of this theory is that obtaining one profit to the opening to the foreign trade is, always and independently of the Compétitivité national, assured. It is about the principal argument of the theorists of free trade against the Protectionnisme, because he refutes the idea according to which the international business does not profit with the least competitive nations. Of course, the theory does not refute that the international business can be made with the detriment certain countries, when its methods are not those of free trade (Impérialisme, Colonialisme, and other forms of domination).

Generally at the base of the teaching of the international economy, this theory old two centuries did not know formal refutation. It is the official creed of the World Trade organization (OMC).

The numerical demonstration of David Ricardo is regarded in economy as a relatively simple exercise. She answers however many assumptions, explicit or implicit, which make it contestable. Since 1817, the economists thus endeavoured to raise these assumptions, complicating and enriching the theory. The empirical validation of the latter, it also, implied a complexification of its postulates and its elements. After Ricardo, many economists, whose several “Nobel Prize” of economy thus associated their names with the comparative advantage. One finds, among most known, John Stuart Mill, Eli Heckscher, Bertil Ohlin, Wassily Leontief, and Paul Samuelson. Although this work always confirmed the results of Ricardo, they specified certain aspects of them, and, by doing this, raised new problems. As example, the theory shows that the commercial opening increases the national wealth, but also that it modifies of it the distribution with the detriment of certain economic agents, perhaps poorest.

Synthesis

This part is a synthesis of the developments which follow it

Summary of the article

According to the theory of the comparative advantages, when a Pays specializes in the Production for which it is, compared to its partners, more favoured or less handicapped , it is then ensured to be gaining with the play of the international business.

In a simplified world, composed of two countries producing two goods, if the country has must give up 3 units of good X to produce an additional unit of the good then, while the country B must give up only 2 units of good X to produce a unit of there, each country grows rich there if has devotes itself to the production of X while B specializes in that of Y. Indeed, the country has can exchange a unit of X against 1/2 or 1/3d' unit of there (against only 1/3 in autarky), while the country B will exchange a unit of there against between 2 and 3 units of X (against only 2 in autarky).

The theory of the comparative advantages constitutes one of the most solid arguments in favor of the liberalization of the exchanges since she refutes way Logique more the protectionist argument running according to which the Libre-échange condemns any country which cannot produce any good with cheaper than its competitor. However it shows only that free trade is preferable with the Autarcie, and not which it is higher than any intermediate marketing policy. In fact, the prolongations of the theory of the comparative advantages led to a series of results which moderate the argument traditional free-trader.

In accordance with the demonstration of David Ricardo, the Specialization of the countries according to their comparative advantages and their integration with the world commerce is advantageous with each one of them. However the international business modifies the distribution of income within each Nation, so that part of the population benefits from the commercial opening while an other suffers from it. The mechanism which governs this evolution wants that the increasing integration of the economies causes, with identical productivity, a convergence of remunerations throughout the world. In theory, the international mobility of the Factors of production (of the Capital men and ) amplifies this process.

This nuance raises the question of the political objectives of the State: to increase the national wealth or to protect certain groups from the individuals, sometimes most stripped, sometimes richest, often certain industries at electoral ends. In fact, this result does not call into question the optimality of free trade insofar as the distribution of the Richesse S can be the policy object of Redistribution intern by the Impôt, which will be or not considered to be legitimate by the population.

In addition, the economic development of the countries partners, when it causes the loss of a comparative advantage, can, theoretically, reduce the profit to the exchange without however calling into question its existence. This very recent assertion makes the object of criticism in the theoretical and empirical plan.

From the empirical point of view, the theory of the comparative advantage pains to explain certain commercial flows. Part of the International business answers the differentiation of the products of different the Firme S competitors, and not only with their Compétitivité in terms of costs. In which case, the Consommateur S benefit from the international business by seeing the range the offered products widening.

This observation forms part of a description of the market where the competition is imperfect (presence of Monopole S and Oligopole S) and where the competitiveness of the companies is partly determined by the quality of their product. In fact, so of new economic theories dispute the thesis according to which the commercial exchanges are always the turnover of comparative advantages, they however reinforce the conclusion of Ricardo on the fact that all the partners profit from the exchanges.

Incomprehension and parabolas

The theory of the comparative advantages, although relatively simple, is often misunderstood, and that even by part of the intellectual elites.

One day the Mathématicien Stanislaw Ulam put at the challenge the “Nobel Prize” of economy Paul Samuelson to quote only one proposal in all to him the Social sciences, which without being commonplace, is true. Several years later, Samuelson proposed as answer the theory of the comparative advantage. He explained why “This concept is logically true because it does not need to be shown with a mathematician and it is not commonplace since thousands of important and intelligent men never could include/understand it themselves or believe in it once it had been explained to them.”

Vis-a-vis this frequent incomprehension, the economists have ingénient themselves for one half-century to find ways increasingly simpler to render comprehensible the theory of the comparative advantage.

In this Popularization with excess, Paul Samuelson imagines a lawyer which does all better than its Secrétaire, and explains that obviously the latter will not be not laid off for as much. Indeed, the lawyer finds interest to delegate tasks and to thus release an additional time for a remunerative work, the treatment of his files. Obviously, the secretary finds also a great advantage not to have to devote itself to a work of lawyer.

The economist James Ingram proposes another Parabole. An American contractor discovered a secret technology which makes it possible to transform with low costs of the American Raw materials (Bois, Blé…) in a manufactured good of great quality. Inevitably, certain American companies suffer from this Innovation, but for as much our Entrepreneur is greeted like a national hero of the market economy. Alas, a Journalist investigation and discovers that makes the contractor of it exchanges on the worldwide markets wood and corn against manufactured goods abroad manufactured. Suddenly, the contractor is shown to be a Traître. However the fact that its success comes from the trade or a secret Technologie strictly does not change anything with the American richness, which in fact is increased.

The theory of the comparative advantage

The classical theory

Political context and ideological of the work of Ricardo

The demonstration of Ricardo

the Richness of the nations is undoubtedly the most known work of all the economic literature, and yet its argument in favor of the Libre-échange, the theory of the absolute Avantage, seems weak. What will arrive at the nation which, beginning on the way of free trade, does not have any “absolute advantage”? In simple terms, which will produce if the nations with which it trade produce all with more facility than it does it? Isn't it likely to see any sound Industrie disappearing?

The object of the theory of Ricardo, exposed in Of the principles of the political economy and the tax , is to answer this question by affirming that even the most handicapped nation will increase its richness, if she chooses free trade.

To render comprehensible to us this principle, Ricardo only imagines an worldwide economy made up of two countries, the England and the Portugal, producing two types of goods, the cloth and the Vin, whose quality is supposed to be identical. Ricardo places England in a completely unfavorable situation a priori : Portugal produces more quickly than it at the same time cloth and the wine. Does England have to close its borders to prevent that its industry does not collapse?

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To answer this question it is necessary to analyze the effects of the possible alternative between the Autarcie and free trade.

In situation of autarky , to produce the two units of wines necessary to the two countries, it will be necessary 200 work hours, while the production of two units of cloth will take 190 work hours.

What does it occur if England produces cloths and Portugal of the wine ? England spends 200 work hours to produce two units of cloth. It will thus save 20 work hours likely to be devoted to an increase in production. If it is supposed that it devotes these 20 hours to the production of cloth, the production will pass to 2,2 units. As for Portugal, it spends 160 hours to produce two units of wine, it thus has still 10 work hours to increase its production, and can thus make it pass to 2,125 units. |}

It is thus noticed that the worldwide production of each of the two goods benefitted from free trade, and that overall, thanks to the exchange which follows, the two nations will be richer than before, whereas they did not increase their efforts. Of course, the demonstration of Ricardo leaves the principle which the goal of the economy is to increase the material wellbeing of the populations, and not to ensure the supremacy of a State on another.

Price determination in John Stuart Mill

The explanation of Ricardo remains incomplete. Admittedly, the co-operation and the specialization of two countries in the production where they have a comparative advantage increase the world richness, but how this surplus of richness will be divided? One can answer this question only by considering the relative Prix products, i.e. about the number of unit of wine which Portugal will have to yield to obtain a unit of English cloth, and symmetrically.

It is the philosopher and British economist John Stuart Mill which solves the question in its Principes of political economy in 1848. It shows there that the determination of the international prize of the products answers the principles of supply and. Indeed, for each possible relative price, the first country will wish to export a certain quantity of the good has and to import a certain quantity of the good B. the second country will adopt a symmetrical attitude by exporting the good B and into important good A. But, it seems improbable that the quantities offered and required are similar. In fact, it should not, in theory, exist that a relative price for which the Offre and the Demande are equalized, it is then about the relative price noted and determined by the Marché. This price determines also the exchanged quantities.

One of the conclusions of John Stuart Mill is that the commercial opening will more benefit the poor countries with the rich countries. Indeed, the desires of Consumption and the means of payment are much more abundant in the rich country, so that the poor country will benefit from a more important and remunerative request for its exports. Contrary, the profits with the exchange of the rich country will be limited by weak the Purchasing power of its partner. This thought optimistic (and contestable) does nothing but reinforce the idea of Ricardo: not only the poor countries can form part of the world commerce, but they benefit from it more than the rich countries.

Simplified modeling of the classical theory

The history of the economic thinking was done in the direction of an increasing mathematisation, so that the results of the theory of the comparative advantages were the subject of demonstrations resorting to the tools of the analyzes mathematical.

the demonstrations which follow are present in the majority of the handbooks of international economy. Although they present the “traditional” theory, they use tools of the “neo-classic” analysis.

Assumptions

To simplify the reasoning, the model ricardien rests on some assumptions, of which some will be raised further. One thus postulates that:

the world knows one factor of production, the work.
It is composed only of two countries, the domestic country and the foreign country.
They produce only two types of goods: for example of the Wine and the cloth.
For these two productions, the domestic country is less productive than the foreign country. This disadvantage is marked less for the production of cloth than for that of wine.
the costs of transport are null.

One is interested in the effects which free trade will have on the domestic country, which one supposes that it holds an absolute disadvantage for the two productions.

The country domesticates in situation of autarky

The produced domestic country and thus consumes only wine and cloth. For the production of a unit of each one of these goods, the workers must devote a certain time. One notes:

$a_ {LV} \,$ quantity of necessary work to the production of a unit of wine and $Q_V \,$ the volume of produced wine.
$a_ {LD} \,$ quantity of necessary work to the production of a unit of cloth and $Q_D \,$ the volume of produced cloth.
$a_ {LV} /a_ {LD} \,$ represents, for example, the production costs of the wine expressed in quantity of unit of cloth (see also “Opportunity cost”).
$L \,$ the total volume of work available

There is thus the following logical relation which defines the “border of the possibilities of production” of the domestic country:

a_{LV}.Q_V+a_{LD}.Q_D=L \,

One uses similar notations accompanied by an asterisk for the foreign country. ( $a^*_ {LD} \,$ will be for example the quantity of necessary work to the production of a unit of cloth in the foreign country).

Relative prices in situation of free trade

In situation of free trade the prices of the wine and cloth are modified because they take into account the supply and of the two countries. Considering that the currency is only one intermediary of the exchange and that the economy produces only two goods here, it is considered that the price of a unit of wine is defined by a certain quantity of cloths and conversely. One notes:

$P_D/P_V \,$ the number of units of wine necessary to the purchase of a unit of cloth, i.e. the relative price of cloth (compared to the wine)
$P_V/P_D \,$ the number of units of cloth necessary to the purchase of a unit of wine, i.e. the relative price of the wine.

One here will seek to define the relative price of cloth in situation of free trade, knowing that of the wine is defined in an identical way. The price is defined by the meeting of the curves of supply and demand, knowing that a transaction can be carried out only when the sold quantity is equal to the bought quantity.

According to the general rules of the human behavior one considers that the raising of prices discourages the consumers, so that the curve of relative request will be decreasing (here, one of the red curves DR.).

The construction of the curve of relative offer is less intuitive:

If $P_D/P_V < a_ {LD} /a_ {LV} \,$ , the domestic country may find it beneficial to produce wine (the price of cloth is lower than the production costs), as well as the foreign country considering that according to our assumption $P_D/P_V < a_ {LD} /a_ {LV} < a^*_ {LD} /a^*_ {LV} \,$ . The relative offer of cloth is thus null considering the world produces only wine.

If $a_ {LD} /a_ {LV}$ (the relative price of cloth is higher than the production costs of the country domestic and lower than the production costs of the foreign country) then only the foreign country may find it beneficial to produce wine, and the domestic country will produce cloth. The relative offer of cloth will be thus equal to the relationship between the worldwide production of cloth and that of wine, namely: $\frac {L/a_{LD}}{L^*/a^*_{LV}}$ .

If $a_ {LD} /a_ {LV}$ (the relative price of cloth is higher than the production costs of cloth in the two countries) the domestic country may find it beneficial to produce cloth, as well as the foreign country. In which case the offer of wine tends to being null, therefore the relative offer of cloth tends towards the infinite one (to voir Limite (elementary mathematics), case of the division of a positive reality by a positive reality tending towards 0).

One can thus build the blue curve of relative offer (OR) and observe the possible relative prices (e.g. of items 1,2 and 3) according to the right-hand sides of relative request possible.

According to the graph, balance between offer and request will be done with the intersection of the two curves (GOLD) and (DR.); since no curve of request (DR) cuts the axis of the relative price, the relative price of cloth will be limited by the inequality:

$a_ {LD} /a_ {LV} \ {P_D/P_V} \ the {a^*_ {LD} /a^*_ {LV}}$ which implies:

a_ {LV} /a_ {LD} \ Ge {P_V/P_D}

“Possibilities of consumption” in situation of free trade

To highlight the profits at the exchange, it is enough to compare the possibilities of consumption in situation of autarky and situation of free trade.

In situation of autarky , consumption is limited by the interior production, i.e. by the function:

$a_{LV}.Q_V + a_ {LD}. Q_D = L \,$

One can deduce a function closely connected from it from directing coefficient $- a_ {LV} /a_ {LD} \,$ expressing the cloth consumption according to that of wine:

$\begin{matrix}a_{LD}.Q_D + a_ {LV}. Q_V = L & \ Leftrightarrow& {a_ {LD}. Q_D = L - a_ {LV}. Q_V} \ \ \ & \ Leftrightarrow& Q_D = L/a_ {LD} - (a_ {LV} /a_ {LD}). Q_V\end{matrix}$

This function, known as of the “possibilities of production”, is represented in black on the graph.

In situation of free trade , the domestic country produces only cloth. A part $Q^ {ex} _D \,$ is intended for export, and each unit is exchanged against $P_D/P_V \,$ units of wine.

$\begin{matrix}a_{LD}.Q_D + a_ {LD}. Q^ {ex} _D = L & \ Leftrightarrow& {a_ {LD}. Q_D + a_ {LD}. (P_V/P_D). Q_V = L} \ \ \ & \ Leftrightarrow& {a_ {LD}. Q_D = L - a_ {LD}. (P_V/P_D). Q_V} \ \ \ & \ Leftrightarrow& {Q_D = L/a_ {LD} - (P_V/P_D). Q_V}\end{matrix}$

The cloth consumption according to that of wine will be thus a function closely connected of directing coefficient $- P_V/P_D \,$ .

This function is represented in red on the graph. It is known that it is higher than the preceding one because it was established that $a_ {LV} /a_ {LD} \ Ge {P_V/P_D}$ . One can thus conclude that the “possibilities of consumption” are more important in situation of free trade than in situation of autarky. This profit with the exchange is represented by the difference between the black line and the line rouge.
In fact, one notices that for a consumed quantity of wine given, it is possible to consume more cloth in situation of free trade than in situation of autarky, and conversely.

Prolongations of the theory

The analyzes of David Ricardo and John Stuart Mill are made in the optics of their current of thought, that of the classical economics which bases the Valeur things on the work necessary to their production. The consequence of this ideological influence is that, at Ricardo and Mill, the differences between country are primarily apprehended in term of Productivité of work. The other factors of production, and in particular the Capital (machines and equipment) are neglected.

Multiplication of the factors of production

It totals two Swedish economists, Eli Heckscher and Bertil Ohlin, to have to the 20th century extends the field of the analysis to the capital factor.

The idea of the Heckscher-Ohlin theory is that there exist goods whose production requires relatively more work than of capital, and conversely. They postulate in addition that these two Factors of production are motionless with the international scales.

Under the terms of the laws of supply and demand according to which the prices are functions of the scarcity, the price of the capital is high in the countries where work is relatively abundant, while it is weak where the capital is the factor of production dominating. The price of work, i.e. the level of the wages, follows identical rules. On the basis of this principle, one understands that the countries strongly equipped in capital will have lower production costs for the goods whose production is more intensive in capital than in work, the Automobile for example. These countries will thus have a comparative advantage in these industries. Conversely the countries whose principal equipment is work will benefit from comparative advantages in intensive productions in work, the Textile for example.

The theory of Heckscher-Ohlin brings two great evolutions, one provides a new explanation on the possible origin of the comparative advantages, the other makes it possible to break with the assumption of the single factor of production.

Gaining and losers of the international business

Wolfgang Stolper and Paul Samuelson, thereafter, sought to include/understand the impact which free trade had on the distribution of income in a given country. When the country forms part of the international business, it increases, by its specialization, the use of the factor of production dominating of its economy, which causes, according to the laws of supply and, an increase in its remuneration. Conversely, by entrusting the production of the goods for which it does not have any comparative advantage, the country reduces its use of the rare factors, and thus remuneration decreases by it. The model of Ricardo showed that all the countries profited from the Libre-échange; while confirming it, the “Stolper-Samuelson theorem” moderates this conclusion by indicating that within each country will be gaining and of the losers, those which until there were favoured by their scarcity.

According to these same mechanisms, the international business would have, subject to a very thorough commercial integration (still far from being reached), to make converge the levels of remuneration of the same factor throughout the world (Heckscher-Ohlin-Samuelson theorem).

Determinants of the comparative advantage

Since the publication of the work of David Ricardo, the economists have advanced many theories aiming at explaining the differential of productivity between the countries.

In the traditional thought, the distribution of the comparative advantages between country is primarily founded on qualitative characteristics: the ability of the workers, the technological detention of advantages S or natural. Number of them are commonplace. Obviously, the countries can be favoured by their Natural resources or their Climat. Those having oil on their territory are obviously more competitive to export some than those while not laying out. The Climate, on its side, explains why the Norway makes come its pineapples from remote regions.

The neo-classic thought enriched the approach by traditional by introducing quantitative determinants. According to Eli Heckscher and Bertil Ohlin, the comparative advantages of the countries are respectively defined by their relative equipments in work and Capital. The countries having a volume of important capital, i.e. of many equipment to assist the tasks of the workers, will have a comparative advantage in the production of industrial goods requiring the intensive use of the capital factor, like the Chimie, the Automobile, the Aéronautique… Inversement the countries having an abundant labor benefit from bottoms Salaire S which enable them to be more competitive in the intensive productions in labor like the Textile or the Assemblage of electronic goods.

To the beginning of the year 1950, the attempt at checking of this theory by Wassily Leontief on the foreign trade of the the United States led to a failure and showed that this country was rather exporter of intensive goods in work, and not in capital as envisaged. However, the “paradox of Leontief” can be solved without giving up the quantitative explanation of the factors, on the condition of widening the concept of factor. Indeed, the United States is Exportateur S of goods having required important a work qualified , while the least advanced countries are exporters of goods whose manufacture does not require any competence (cf more low Validité of model HOS) In this case, the synthesis of the approaches quantitative and qualitative thus allows well to explain the international exchanges while basing itself on a difference in equipment in factors of production.

The distinction of the factors of production can thus take more precise and various forms, if one differentiates various types of workers, different standard from capital, different standard from natural resources…

Lastly, the theory of the life cycle of the product renewed the technological approach. According to Raymond Vernon, the life of a product is divided into several stages, corresponding to several phases of the international business. Initially, the product just designed in a rich country must be tested, and the national market is then indicated the most, the more so as the still high price of the good corresponds to the Standard of living of the rich country. Newcomer at a stage of maturity, the company about to lose exclusiveness on the product is encouraged to sell it on the overseas markets before the arrival of its futures competitor S. the good, if he is an important success, is then produced in larger quantities what causes a fall of its unit costs of production and thus of its price. It thus becomes accessible to the consumers from the less easy countries. The rich countries hold a comparative advantage then. When the product reaches a stage of Standardization and is standardized, its production becomes possible in the countries with low wages, and the company, to maintain its competitiveness vis-a-vis the competitors, must in delocalize the production in the countries with bottom Salaire S to re-export it thereafter in the rich countries. The comparative advantage is thus from now on between the hands of the countries with low wages.

When two countries do not have the same currency, and that the Foreign exchange rate is not revealing real economy, the monetary costs do not reflect any more the real costs and are likely to modify artificially the distribution of the comparative advantages. Historically, this problem was solved a long time by the fixed systems of exchanges (until the beginning of the Années 1970) and/or of gold standard. Into the contemporary world, after the end of the Agreements of Bretton Woods in 1973, the floating or semi-fixed Foreign exchange rates introduce an uncertainty on the profits with export. Within monetary areas, like the Euro area, the risk of variations of rate of exchange likely to distort competition justified the installation of a Single currency.

Harmful growth from abroad

In an article of 2004, Paul Samuelson tried, thanks to the theory of the comparative advantages, to determine the impact of the Technological advance S of the emergent countries on the growth of the advanced countries. It shows that a country can see its profits with the international business being reduced when the technological advances made by foreign countries come to dispute its detention of a comparative advantage, and by doing this reducing the price or the volume of its exports. Applied to a case of topicality, the conclusion of Samuelson is that, if the China increases sufficiently its productivity for the goods which it is essential currently, its needs for provisioning coming from the the United States or for the European Union will be reduced, causing a degradation of the terms of trade for these rich countries.

This demonstration is primarily theoretical, and thus develops a possibility not checked hitherto in the facts. The empirical study of the terms of trade shows that their evolution since 1980 was done with the detriment of the countries of the Asia of the South and the East, and that this degradation accelerated since 1996.

Moreover, the theoretical conclusion of Samuelson must be correctly interpreted: to in no case it does not call into question the existence of the profits highlighted by Ricardo, but specifies only that these profits are likely to be reduced under the effect of a redistribution of the comparative advantages between country.

Critical and empirical analysis of the theory

The scientific plan, the economic theory meets all at the same time a positive aim, description of the phenomena observed, and with a normative purpose, that of advising the economic agents, and in particular the State. The relationship between the theory and reality is thus of two orders: adequacy of the theoretical explanation to the empirical observation on a side, impact of the theory on the history of the men of another.

Historical impact of the theory

Which concrete impacts thus had the theory of the comparative advantage on the history?

The work of Ricardo undoubtedly turned into to the United Kingdom the cantor of free trade in Europe, and inspired the waves of liberalization of the International business, initially in the Années 1860, then after 1945. But the description of the exchanges proposed by Ricardo is also found in the commercial domination of the nations imperialists at the 19th century.

Birth of free trade

The conceptualization of the comparative advantage at the beginning of the 19th century is registered with the the United Kingdom in a political debate with the multiple outcomes.

The United Kingdom then has the most productive Agriculture of the world, and made up for with the economic plan lost time which it had on its large neighbor, the France. British Isles are still the only territory where the Industrial revolution began, and they are essential like large gaining of more than twenty years of European wars. For as much, the return to the Paix in 1815, which means the end of certain commercial obstacles, worries the landowners of Great Britain which manage to make revoter the Corn Laws , of the protectionist laws on the Céréale S. It is in this context that Robert Torrens points out, in vain, that Great Britain will obtain more vivres by producing industrial goods to exchange, that by devoting itself to agriculture.

The formal reasoning of Ricardo, two years later, shows the principle which chairs the intuition of Robert Torrens. The example of the wine and cloth is completely pain-killer, and refers to an old commercial treaty between England and Portugal, but Ricardo aims directly in fact the Corn Laws . the Principles of the political economy and the tax are a reflection on the distribution of income between the Social classes, where Ricardo tries to show that the rise of the population (it triples in one century), while feeding the rise in the prices of the grain, will concentrate the national wealth between the hands of the idle landowners, with the detriment of the Entrepreneur S. According to him, a solution with this problem is the unilateral commercial opening of the market of the grains to the foreign trade.

It is notable that it is the latter argument, and not that of the comparative advantage, which appears decisive. In 1839, the industrialists of Manchester found the Anti-Corn Laws League , an association directed by Richard Cobden which fights the interests of Landlords. Associated with the Proletariat to which she promises that free trade will cause a fall of the farm prices, she launches out in a political confrontation which lasts several years. Ricardo then died since a score of years, but Robert Torrens takes part in the debate and finds a first objection with liberalization supplements by showing that, by its power, the United Kingdom is likely to improve its terms of trade thanks to a weak customs tax. In 1845, begins, on British Isles, one of the most terrible famines of the history, related to a disease of the apple ground in Ireland. This one allows, in 1846, with the Prime Minister Robert Peel to obtain Parlement the suppression of Corn Laws.

This measurement remains a quasi new history, considering which it is about a commercial concession without reciprocity, granted by a free country of very forced (considering it is about the first world power). But obviously, a country cannot practice all alone free trade. It is here that the theory of the comparative advantage plays a part to convince the other powers, economically late, to open their borders. Napoleon III is the first to let itself convince and signs in 1860 a first treaty of free trade with the United Kingdom, whereas the French industrialists, believing themselves in advance condemned, shout with the “commercial coup d'etat”. In front of the success of this agreement, many powers of Europe like the Italy, the Belgium and the Zollverein (future Germany) sign similar treaties.

The logic of the comparative advantage in the British empire

The principle according to which the world commerce is always advantageous for all is tempting on the theoretical level, but is completely false on the historical level, would be this only because the Libre-échange is never perfect. The Historien Paul Bairoch described the transformations of the production within the British empire and the disasters which a theory at the very least badly included/understood could cause.

The work of Ricardo is not devoted to a theoretical study of the International business, but to a criticism of the distribution of the richnesses in the England of the beginning of the 19th century. Its essential conclusion is that the scarcity of the fertile grounds on the British Isles causes the concentration of the incomes in the hands of the landowners. To answer this problem, it finally suggests with its country giving up its agriculture with the profit of industry, and exchanging the production of its Manufacture S against foreign vivres.

It is precisely what the the United Kingdom during the century will do: to organize the world commerce in term of comparative advantages. But this organization is not that induced by the laws of the market in a context of Libre-échange: it acts in fact of the installation of a international division of the production within the framework of the greater empire of the history.

At the time of Ricardo, England is the only great power to have known the agricultural Révolution, and its agriculture is thus most productive of the world. It is however sacrificed to the profit of industry according to the logic described by Ricardo, causing the rise of the Working class and the unhealthy Urbanisation of the Industrial revolution. Self-sufficing at the beginning of the 19th century, England will depend for more of two thirds from abroad for his Alimentation at the beginning of the next century.

Conversely, if England gave up its agriculture, one of its nations “partners”, or rather colonized, must give up its Industrie. Whereas the India is the first producer of textile of the world, she sees entirely disappearing her artisanal production from fabric which cannot face the high productivity of British cotton industry. Will India produce the vivres which England needs? Not because the comparative advantage of the country is not there. India sees, on the contrary, crumbling its food agriculture, sacrificed by the British to the profit of the culture of tropical products, like the Coton, the Jute, or the Indigo. The culture of the Pavot is also one of these productions for which India has a comparative advantage. Alas, the China, principal potential consumer, closed her ports with this product of which the leaders know the disastrous effects on the population. England will thus deliver a “to him Guerre of opium” (1838 - 1842) to impose this trade to him.

In fact, in a historical context more marked by the Impérialisme that by free-trade, the detention of comparative advantages by the least powerful nations was often transformed into true curse.

Empirical validity of the theory

Observability of the advantages ricardiens

The theoretical plan, the model suggested by David Ricardo who rests on the differences in relative productivity answers a so great number of assumptions that it seems improbable that he is confirmed by the observation of international flows of goods. However, a great number of studies came to confirm it.

In 1951, a study relating to the exchanges between the Great Britain and the the United States for example validated the model of Ricardo. The shortly after the Second world war, the Productivité of the American workers was on average twice higher than that their British counterparts in all the industrial branches of industry. But as the American wages twice were raised, the United Kingdom laid out, in fact, of costs lower than those noted in the United States in some sectors. However the study of the structure of the trade showed that the British were exporters in these sectors and importers in the others, so that the Anglo-American exchanges answered the comparative advantages well of each one.

Today the studies on the empirical validity of the theory ricardienne run up against a major epistemological obstacle. Indeed the base of the analysis of Ricardo rests on the comparison of the relative costs of production in situation of Autarcie, but in the current context of the economic Mondialisation it is very rare that a country having a comparative disadvantage continues to produce the good concerned, so that there does not exist any data Statistique making it possible to estimate the productivity of the various participants in the international business. However if one is unaware of the productivity of a country for the production of although it imports, one cannot know if its situation of importer derives from the detention of a comparative disadvantage with respect to the exporting country. The measurement of the influence of the relative costs of production on the structure of the international business is thus very difficult.

Validity of model HOS

In 1951, Wassily Leontief tested the Modèle Heckscher-Ohlin-Samuelson on the structure of the foreign trade of the United States and showed that, against any waiting, this country exported more intensive goods in work that goods requiring much capital. This empirical observation is known under the name of paradox of Leontief because it enters in contradiction with the forecasts of the theory. In fact, many explanations to this paradox were advanced without giving up the principles of the theory, Leontief itself having explained why the United States was in fact a relatively abundant economy in work insofar as the American workers were then much more effective than the majority of their foreign counterparts.

The most traditional resolution of the paradox consists in distinguishing work qualified from work not qualified. In which case the intuition of Heckscher and Ohlin on the importance of the equipment in capital and work is partly refuted, but the theoretical reasoning preserves all its relevance, considering which it is enough to replace both Factors of production of origin (capital and labor) by the new distinction (qualified work/not qualified). In 1962, a study confirmed the relevance of this resolution of the paradox by showing that American exports were more intensive in qualified work than the imports.

To check if model HOS remained valid on the condition of exceeding the only distinction capital/work, other studies multiplied the factors of production in order to compare the predictions of theory HOS with commercial flows actually observed. A study of 1987, fascinating of account 12 factors of production (capital, work, frameworks, workmen, pastures…), showed that the forecasts of the theory were not exact that in a little less than 70% of the cases, quantifies in fact relatively weak considering the complete absence of Corrélation would have implied a result close to 50%.

All in all, the model of Heckscher-Ohlin explains finally only the Northern trade - Southern, i.e. between country from which the economic structures are very different. However the North-South trade of manufactured goods represents only one tenth of the world commerce.

The problem of the trade intra-connects

The theory of the comparative advantage explains the exchanges of different products between different countries. But in the facts, the essence of the international business is carried out between similar countries which exchange substitutable products. How, for example, to explain that the Germany and the France exchange cars mutually? This part of the international business seems to escape the determinants described by the theory from the comparative advantage, and caused the appearance of alternative theories.

Alternative theories

According to Paul Krugman and James Brander, this trade intrabranche can be explained by the oligopolistic structure markets. On the basis of the report that certain branches of activity are dominated by a small number of Entreprise S, they explain why free trade results in a setting into international Concurrence, in which the companies try to be destabilized mutually. With this intention, each firm tries to conquer market shares in the foreign countries, and sells to with it less expensive than on its national market. As a practitioner this “reciprocal Dumping”, each firm tends to gain market shares abroad, and to lose some on its national market. The result of the opening of the borders in this context of oligopolies is an increased competition which appears by the exchange between similar countries of products and by the fall of the prices.

Economists like Avinash Dixit, Victor Norman, Kelvin Lancaster or Paul Krugman, in addition showed that the presence of the economies of scale could, in the absence of comparative advantages, to cause arbitrary international specializations in certain economic branches. If two countries have identical productivities in all the branches of activity, they have, according to the theory of the comparative advantage, no reason to specialize. The contemporary theory contradicts this forecast of the classical theory: the countries may find it beneficial to specialize, because this specialization causes economies of scale, namely that the increase in the volume of the production of a good in a country enables him to lower its unit costs of production. However, this new theory, while raising two of the assumptions of Ricardo (that of the constant returns, and that of the need for differences in productivity between partners), does nothing but reinforce the final conclusion according to which the exchanges are always beneficial.

The last great explanation of this trade intrabranche is the taste of the Consommateur S for diversity. On each market, the companies are made a competition at the same time on the prices, but also on the differentiation of their products. When a country opens with the world commerce, its firms can offer their products on the overseas markets, where they will be more or less competitive, as much for reasons of cost that of quality. The commercial opening then makes it possible to carry out a profit not measured by the theory of the comparative advantage because the product range differentiated suggested to the consumers is increased, while the firms reduce their production costs while having a widened market allowing the realization of economies of scale.

The defense of the comparative advantage

Whereas developed the alternative theories, the approach of the international business in term of comparative advantage is it also renewed.

The defenders of the thesis of Ricardo refute initially the nonexplanatory character of the theory of the comparative advantages, for the commercial exchanges between similar countries. They point out that the “similar” qualifier is a rough approximation and that the countries are never identical. The analysis of the intrabranches exchanges between these countries makes it possible to see that the exchanges of the vertical type, namely the exchange of products of quality different, account for example 72% of this type of trade within the European Union. However this differentiation of the products, known as “similar”, in qualitative term makes it possible to reintroduce the determinants ricardiens international exchange The application of the theory of the comparative advantage in a model with two goods, but with more than two countries makes it possible, in addition, to explain the variable character of specializations. Between the country having the best comparative advantage for the wine, and that having the best comparative advantage for cloth, are located, according to some Hiérarchie (known as “scale of Edgeworth”) an important number of intermediate countries. If the world price of cloth is raised, the intermediate countries will rather tend to produce cloth, and conversely. The trend of the relative prices on the worldwide markets will be thus likely to make rock an intermediate country of a production with another, creating transitory situations in which the intermediate countries import and export the same products.

Always according to this principle of hierarchy of the comparative advantages, for the production of wine, a country has can have a comparative advantage on B, while B has one of them on C. In which case, the country B will import wine since the country has, and towards the country C. It will export some will thus be found importing and exporter of the same product.

Another explanation, if a country tries to create, thanks to an adequate policy, a comparative advantage in the production of a good has, it will reduce its imports gradually and will increase its exports gently, passing in this case by an intermediate situation, where he will be importer and exporter of the same good.

In addition, with the national scales, all the companies producing the same good do not have necessary the same productivity. By analogy with the country having comparative advantages, the companies lay out of competitive advantages. It is possible that in a country laying out, overall, of a comparative disadvantage, and being thus importer, some companies have a competitive advantage enabling them to export.

Comparative advantage and free trade

The theory of the comparative advantage shows obviously that free trade is infinitely preferable with the economic plan with autarky, but does not allow to conclude with under-optimality from a limited and targeted customs protection. In fact, the objections with the principle of the comparative advantage are numerous.

Case of commercial protections

A first objection is related to the determination of the terms of trade. In the classical theory, if England specializes in cloth and Portugal in the wine, then the two countries will gain there more or less according to the price of the cloth wine such as it is given on the international markets. If a country is sufficiently powerful economically, it may be that its installation of a tiny Customs duty forces its partners to reduce the price of their exports in order to maintain the price perceived by the Consommateur S. In this case, the powerful country benefits from an improvement of its terms of trade which will enable him to import more while exporting less. This reasoning is undeniable in the intellectual plan, but in practice it can apply only to great powers like the the United States or the European Union, which, by adopting this type of attitude in a not concerted way, would be likely to start a commercial war which would reduce the profits caused by the exchange.

The second objection is related to the existence of Défaillances of the market, and more precisely of Externalité S. For example, if a production makes it possible to accumulate Savoir-faire, to increase the Productivité of the whole of the economy or to fight against the Chômage, then its sacrifice will have a cost not measured by the theory of the comparative advantage. It is thus possible that the stimulation of this production thanks to targeted commercial protections can increase the public welfare by protecting these externalities, likely to bring a richness higher than that gotten by free trade. There still, the protectionist reasoning is exact and the installation of a targeted protection is effective. However the defenders of free trade announce that in the majority of the cases, there exist better instruments that the marketing policy to correct the failures of market and to solve the problem of the externalities, as for example the direct subsidy of the productions which the government wishes to stimulate. The optimal policy is then suitable and associates free trade and official Intervention intern. According to this rule, when countries are specialized in productions knowing a great volatility of the prices, they can find interest to associate free trade with an internal policy of regulation of the production (quota, stocks…).

Variations of the sectoral comparative advantages

An increase in the comparative advantage of a country in a specific sector (for example the oil exportation following the discovery of a layer) can cause a phenomenon of “Dutch Maladie”: exports of the country concentrate on a good, and the other exporting sectors of the economy undergo losses of Competitiveness-price and must be adjusted with the new situation.

The brutal variations of incomes which in strongly specialized countries the price changes of certain markets involve (agricultural produce, raw materials, etc) disturb the profits with the exchange of the comparative advantages. Certain sectors are indeed subjected to another failure of the market: a great volatility of the prices. A solution to attenuate these shocks is to have recourse to investment trust to smooth these variations of incomes.

Influence imperfect competition

Finally the theory of the Imperfect competition, which describes the worldwide markets as dominated by a small number of large companies, being made as much competition on the prices that on the products, objects that, as opposed to what claims the classical theory, the prices are not inevitably revealing Production costs. In other words, a foreign company, because it holds a Monopole on a product, can practice an high price. However if the foreign company practices a selling price largely higher than its manufacturing costs, the government can raise a targeted tariff barrier, which, without reducing the volume commercial (insofar as there remains profitable for the foreign company), makes it possible to increase the national wealth by improving the terms of trade. It seems that again, the optimal marketing policy does not rest on free trade but on a reduced protection. This protectionist proposal meets same the diplomatic objection as the evoked first; but especially the divergence between the noted selling prices and the manufacturing costs is disputed by the econometrics and the theory of the contestable markets, according to which the monopolists tend never not to force abnormally high prices in order not to let develop a possible competition.

Variations of the factors of production

Other objections rest on the criticism of the assumptions considered to be nonrelevant of the theory of the comparative advantage. One among it would pose, for example, the Plein-emploi of the factors of production, and thus the absence of Chômage, assumption which seems absurd in the current context of many countries. In truth, the implicit postulate of Ricardo is, more exactly, the constant character of the volume of work used. Initially, the question of the international business and its evolutions is problems of long run, and the economies tend to correct the problems of employment over the long periods. In addition, the modern States have central banks which tend, by the monetary policy, to limit the variability of the Unemployment rate, around its structural level, NAIRU, so that the short-term variations of the volume of employment are relatively weak. The implicit assumption of the constant volume of work is thus a relevant approximation.

In the context of the economic Universalization, one of the explicit assumptions of the theory of the comparative advantage collapses, that of the immobility of the Factors of production. Today, the Multinationale S meet only few difficulties of transferring their capital from one country to the other. This mobility of the factors is not in fact not at all new; initially because the mobility of the capital was already important at the end of the 19th century, then because the mobility of the workers is one of the historical phenomena most outstanding of this one. The popular objection with the theory of the comparative advantage is simple: if the capital can pass from one country to the other, they will tend to concentrate around the “absolute advantages. ” In fact, from a theoretical point of view, the mobility of the factors of production rests on the same determinants as the mobility of the products. As showed it Robert Mundell, in model HOS, the products pass from one country to the other because of the obstacles which as much meets the factors of production to make; conversely the factors move when the mobility of the products is restricted. The international business lies in an exchange of differences, passing either by the products, or by the factors. If the products can travel freely, without Customs duties and cost of Transport, the place of production imports little, and flows of factors will be negligible. Contrary, if a Entreprise thinks of being able to carry out profits in a foreign country, but that this last practice of the prohibitory customs duties, its only chance will be to go to produce on the spot to circumvent the obstacle. Accordingly, the theoretical effects of flows of capital are similar to those of the flows of products in model HOS: profits of remuneration for the dominant factors, loss of revenue for the factors whose scarcity is suddenly disputed. In term of National revenue, an American capital invested abroad for reasons of Rentabilité will cause a rise of the production abroad and a fall of the production to the the United States, but to final, the profit carried out in term of income will be allocated to the US investor. It should be noted that many free-traders are hostile with freedom of movement of the capital, but for other reason, in particular because their strong volatility causes instability in many countries, causing bubbles and Financial crises or of debt.

See too

Internal bonds

Theory of the international business: absolute Advantage - Model Heckscher-Ohlin-Samuelson - Paradox of Leontief
Authors: Robert Torrens - David Ricardo - John Stuart Mill - Eli Heckscher - Bertil Ohlin - Paul Samuelson - Wassily Leontief - Michael To carry
Context: Mercenary attitude - Universalization economic
Debate: Free trade - Protectionism
Role of the knowledge and the networks: Pole of competence

External bonds

Bernard Lassudrie-Duchêne and Deniz Ünal-Kesenci, “the comparative advantage, concept basic and discussed”, in the Worldwide economy , CEPII, 2002
Ricardo' S Difficult Idea , an article of Paul Krugman on subtleties of the comparative advantage, and the difficulty for the not-economists of including/understanding this principle.

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